- Australia’s economy has been lagging the recovery seen in other comparable nations
- JP Morgan thinks this trend will persist, putting them at odds with the RBA
- It says high household debt levels and weak wage growth will limit any recovery in consumer spending
For the first time in over a decade, the global economy is looking strong.
To borrow a sailing analogy, after years of sitting in the doldrums, the tailwinds have picked up and the Spinnaker has been deployed. It’s finally starting to move.
Except in Australia.
While the momentum is building in the global economy, something that usually translates to a pickup in economic activity in Australia given it is a small, open economy rich with mineral resources, the Australian economy has been flagging.
GDP is growing below trend despite soaring employment growth, strong population growth and firmer commodity prices, acting to keep inflationary pressures muted and unemployment and relatively elevated levels, especially compared to what’s been seen in other advanced economies.
The winds are up but the Spinnaker is torn, leaving the economy languishing behind the pack.
To JP Morgan’s Australian economics team, led by Sally Auld, the Australian economy is clearly out of sync with the rest of the world, and despite optimism from the Reserve Bank of Australia (RBA) and others that this will soon change, it doesn’t share that view.
“The most important point is that the desynchronization is not over,” JP Morgan says.
“While the headwinds from the mining capital expenditure unwind are largely behind us, Australian GDP growth is still hamstrung by a constrained consumer.
“This is in stark contrast to the global consumer, which is benefiting from strong employment, a less levered balance sheet and fading financial crisis-related caution.”
Household debt levels remain high and wage growth low, in other words, ensuring that consumers remain reluctant, or unable, to lift their spending levels.
As the largest part of the Australian economy, this presents a problem.
“We wrote last year at length about the structural headwinds facing the consumer in Australia, and don’t believe that 2018 will deliver much different on this front, with growth in household consumption volumes likely to annualise in the low 2% [level],” the bank says.
“This would be a tepid outcome relative to average run rate seen over the past decade.”
To show why spending isn’t responding to stronger employment and population growth, JP Morgan points to a variety of indicators that help explain why it’s lagging compared to the recovery seen in comparable economies around the world.
For one, it says Australia’s household savings rate — the proportion of disposable household income saved — has declined almost 5 percentage points in the three years to 2017, far larger the decline of around 1.6 percentage points for developed economies as a whole.
So Australians have been saving less to sustain spending levels, likely due to continued weakness in wage growth.
JP Morgan points out that unit labour costs — the cost of labour per unit of output — increased by 5.8% in developed economies since early 2013, more than double the 2.8% in Australia over the same period.
Adding to the headwinds for consumers, debt levels have soared since the depths of the global financial crisis with Australia’s household debt-to-income ratio increasing by 29.5 percentage points. Over the same period, the same ratio for developed economies declined by 7.6%.
And helping to explain what that debt increase was used for, JP Morgan says Australian house prices increased by 131% in real terms since the 2000, four-times greater than the 33% OECD average.
This, the bank says, has constrained the household sector, going someway to explaining why Australian economic growth has been underwhelming.
“Australian households have saved less and borrowed more relative to income than their developed economy counterparts in recent years, and have suffered slower wages growth too,” it says.
“This leaves the balance sheet of the Australian consumer in a far less superior condition than that of its peers”, adding “a high level of leverage on the household balance sheet remains the fundamental constraint for the Australian consumer”.
And it doesn’t expect that trend to change anytime soon.
“This constraint is unlikely to ease given the persistence of excess capacity in the labour market and regulators’ determination to sustain a lengthy period in which both house price and credit growth are broadly in line with incomes growth,” the bank says.
With the headwinds from high levels of indebtedness and weak age growth likely to persist in its opinion, JP Morgan says if the Australian economy is to fall back into sync with other developed economies, it will likely occur during the next global economic downturn.
“We believe that desynchronization is not symmetric,” it says.
“While the Australian economy is underperforming in a global upswing, it is not likely to outperform in a global downturn given its status as a small, open economy.”